Start-up firms' investments: when economic policy uncertainty matters?

Abstract

Purpose: This study examines the impact of economic policy uncertainty (EPU) on investment decision-making of start-up firms in Japan. While existing literature suggests firms generally retrench investment under EPU, the authors argue that start-ups’ investment behaviours are likely different given the fact that start-ups always have to compete for survival. Design/methodology/approach: The authors investigate the impact of general economic policy and policy-specific uncertainty, including monetary policy, fiscal policy, trade policy and exchange rate policy uncertainty, on corporate investment of start-up firms using multiple fixed-effect regression. A wide range of robustness and endogeneity tests are conducted to ensure the validity and soundness of the empirical findings. Findings: The authors document a positive effect of EPU on start-up investment, to suggesting that the investment behaviour of start-ups is backed by venture capital distinct from that of mature firms. The results show that start-ups are more vulnerable during the changes in trade and exchange rate policies; uncertainties in monetary and fiscal policies do not restrain firms' investment. However, the effect varies in the cross-sections. Financial constraints have a moderating effect on the relation-ship between EPU on start-up investment. Institutional investors have an incremental effect on the positive relationship between EPU and start-up investment by encouraging risky investments. Originality/value: This is the first study to investigate how start-up investment is influenced by EPU, thus providing a new understanding of the investment behaviour of start-up firms during uncertainty. Further investigation sheds light on the roles of institutional and managerial ownership in this newfound relationship.